M&T Bank Corporation
Q4 2014 Earnings Call Transcript

Published: 20 Jan 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the M&T Bank Fourth Quarter 2014 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. [Operator Instructions] It is now pleasure to turn the floor over to Don MacLeod, Head of Investor Relations. Please go ahead, sir.

[Don MacLeod:]

Thank you, Lorie, and good morning, everyone. This is Don MacLeod. I'd like to thank everyone for participating in M&T's fourth quarter 2014 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link. Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, René Jones.

[René Jones:]

Thank you, Don, and good morning, everyone. As I noted in this morning’s press release, the past year was one of substantial progress for us. Our results included lower credit costs, as well as notable improvements in our liquidity, capital and overall risk profile. We made excellent progress on our critical initiatives to strengthen M&T’s BSA/AML compliance and overall risk management infrastructure. And while the target investments that we made moderated our return on tangible common equity to a shade below 14% for the year, the -- taking these steps now positions M&T well for the changing -- for the change to banking environment. Our results for the last quarters -- our results for last year’s final quarter were characterized by higher revenues, dampened by a slightly higher tax rate. As we usually do, I'll start by reviewing a few of the highlights from M&T’s fourth quarter and full year results, after which Don and I will be happy to take your questions. Remember that you can reenter the queue if you have additional questions that haven't been answered. Turning to the details, diluted GAAP earnings per common share were $1.92 for the fourth quarter of 2014, improved from $1.91 in the third quarter and a $1.56 in the fourth quarter of 2013. Net income for the quarter was $278 million, up from $275 million in the prior quarter. Net income was $221 million in a year ago quarter. There were no noteworthy items impacting M&T’s third and fourth quarter 2014 results. However, recall that our results for the fourth quarter of 2013 included an after-tax $24 million litigation related accrual, which amounted to $0.18 per share. As you are all aware, since 1998 M&T is consistently provided supplemental reporting of its results on a net operating or tangible basis, from which we exclude the after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions when they occur. Our after-tax expense [$0.26] [ph] per common share in the recent quarter, relatively unchanged from the prior quarter. Net operating income for the fourth quarter, which excludes intangible amortization, was $282 million, up slightly from $280 million in the linked quarter. Diluted net operating earnings per common share were $1.95 for the recent quarter, up from a $1.94 in the linked quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders equity of 1.18% and 13.55% for the recent quarter. The comparable returns were 1.24% and 13.8% in the third quarter of 2014. In accordance with SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Turning to the balance sheet and the income statement, taxable equivalent net interest income was $688 million for the fourth quarter of 2014, an increase of $13 million from the linked quarter. The net interest margin was 3.10% during the quarter, down 13 basis points from 3.23% in the third quarter. The margin compression included the following component, substantially all of the decline came as a result of higher deposits from our institutional trust business and which we in turn held at the Federal Reserve. On an average basis interest-bearing deposits with banks including the fed were nearly $4 billion higher in the fourth quarter than in the third quarter, that increase added to net interest income, but diluted the margin by an estimated 13 basis points. The credit performance of our acquired loan portfolio continues to outperform relative to our previous estimates. As a result, three years after the Wilmington Trust merger and five years after the Provident merger, we continue to realize higher than projected cash flows from those required portfolios. In the fourth quarter, interest income on all acquired loans was $49 million, increased from $43 million in the previous quarter. This had the effect of boosting the net interest margin by about 3 basis points, which was offset by a like amount of compression in the core margin. Average loans increased by $1 billion or 6% annualized compared to the third quarter. The improved face of activity we saw late in the third quarter carried through to the fourth quarter. On that same basis, average C&I loans increased an annualized 5%, influenced by seasonal strength in the auto floor plan portfolio. Average commercial real estate loans increased by about 9% annualized. This included double-digit annualized growth in Upstate and Western New York, and improved activity in New York City -- in our New York City Metropolitan region, which had M&T includes New Jersey and Greater Philadelphia, as well as New York. Also contributing to that growth is a larger held for sale pipeline in our commercial mortgage banking operation, which had its strongest quarter since the second quarter of 2013. Residential mortgage loan volumes increased an annualized 1% and average consumer loans grew an annualized 7%, reflecting growth in indirect auto and recreation finance loans. Overall, end of period loan growth was just slightly stronger than the average, up $1.1 billion or 7% annualized. The past quarter results are relatively consistent with what we've been seeing over the past 12 months, with better growth in Upstate New York and in the New -- Metro New York City area, driven by somewhat stronger economic growth that we're seeing in Pennsylvania, Baltimore and elsewhere in the Mid-Atlantic, and this is despite the intense competition that we see across the entire footprint. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over 250,000 increased an annual annualized 27% in the third quarter, reflecting the increase in trust deposits, I referred to you earlier. Given their typical short-term nature the trust deposits declined meaningfully by the end of the quarter and reached to more normal level on an end of period basis. Turning to non-interest income, non-interest income totaled $452 million in the fourth quarter, little change from the prior quarter. There were no securities gains or losses in either period. Mortgage banking revenues were $94 million in the fourth quarter relatively unchanged from the prior quarter. Lower revenues associated with residential mortgage origination activities were offset by strong origination activity on the commercial side, commitments to originate residential mortgage loans for sale declined by about 16%, while the gain on sale margin was relatively unchanged. Fee income from deposit services provided were $106 million during the fourth quarter, compared with $110 million in the linked quarter, reflecting a slowdown in consumer service charges, as well as in commercial fees. This was offset by higher credit related fees, which are included in other revenues from operations and which were -- noticeably stronger in the fourth quarter compared with somewhat soft third quarter. Turning to expenses, operating expenses for the fourth quarter, which exclude expense from the amortization of intangible assets, were $673 million, also little change from the prior quarter. Salary and benefits were $345 million, down $4 million from $349 million in the third quarter. Furniture, equipment and occupancy costs were $62 million, down $5 million from the prior quarter, reflecting -- primarily reflecting lower depreciation expense. All other operating expenses were up by $10 million from the previous quarter. The increase relates to cost of litigation defense, as well as investments in technology and risk management infrastructure. Expenses arising from the BSA/AML compliance initiative were essentially flat. The efficiency ratio, which excludes intangible amortization, was 59.1% for the fourth quarter compared with 59.7% in the prior quarter and 65.48% in the year ago quarter. Next, let’s turn to credit. Our credit quality remains extremely strong. Non-accrual loans declined further from the end of the third quarter. The ratio of non-accrual loans to total loans declined by 9 basis points to 1.20% at the end of the fourth quarter. Net charge-offs for the fourth quarter were $32 million, compared with $28 million in the third quarter. Annualized net charge-offs as a percentage of total loans were 19 basis points for the fourth quarter, consistent with the full year figure and slightly up -- and up slightly from 17 basis points in the previous quarter. The provision for credit losses was $33 million for the recent quarter. The allowance for credit losses was $920 million, amounting to 1.38% of total loans as of the end of December. The loan loss allowance as of December 31st was 7.6 times 2014’s net charge-offs. Loans 90 days past due, on which we continue to accrue interest excluding acquired loans that had been marked to fair value at acquisition were $245 million at the end of the recent quarter. Of these, the loans, $218 million or 89% are guaranteed by government related entities. Turning to capital, M&T’s Tier 1 common capital ratio was an estimated 9.83% at the end of December, up 7 basis points from 9.76% at the end of September and up 61 basis points from the end of 2013. Our estimated common equity Tier 1 ratio under the Basel III capital rules on a fully phased-in basis is 9.59% at the end of 2014. Before we turn to the outlook, I will take a moment to cover the key highlights of 2014’s full year results. GAAP based diluted earnings per common share were $7.42 compared with $8.20 in 2013. Net income was $1.07 billion, compared with $1.14 billion in the prior year. Net operating income, which excludes the amortization of intangibles and merger-related expenses, was $1.1 billion compared with $1.2 billion in the prior quarter. And diluted net operating income per share was $7.57 per share, compared with $8.48 per share in 2013. The rate of return on average tangible assets and average tangible common shareholders’ equity for 2014 was 1.23% and 13.76%. Recall that results for 2013 included $67 million of net after-tax securities and securitization gains, amounting to $0.51 per share, which were incurred as we reposition the balance sheet for our first-time participation in the CCAR program. Other noteworthy items impacting 2013 results were an after-tax $15 million benefit from the reversal of a purchase accounting accrual related to the Wilmington Trust merger and the litigation related accrual I referred to earlier. Turning to the outlook, as is our usual practice without giving specific guidance, we’d like to share our thoughts for the coming year. We are looking for loans to grow at a pace consistent with the 4% increase we've seen over the past 12 months. Investment securities will increase as we execute -- should increases as we execute the remaining actions needed to reach compliance with the liquidity coverage ratio. And offsetting those increases should be a decline in cash held at the Fed, as trust deposits have returned to more normal levels. Our guidance on the net interest margin is little changed. We are expecting about 3 to 4 basis points of core margin compression per quarter. If short-term rates start to rise as the forward interest rate curve currently implies, the impact will tend to be offset by -- that impact will tend to be offset. Purchase of securities, as we complete our LCR build-out over the next three quarters, we will further dilute the margin but should have little impact on net interest income. I think it's important to note that as you think about those comments, that our 310 margin for the fourth quarter of 2014, as a starting point, obviously was influenced by that 13 basis points that we mentioned with higher cash balances. We are looking for low single-digit growth in fee revenues. Our growth last year in core wealth and institutional service business was in the mid-single digits and we are looking to match, if not better that pace in 2015. We see the possibility of an absolute decline in mortgage banking fees depending on where interest rates go. Consistent with our previous comments regarding expenses, we anticipate normalizing some of the professional service spending in 2015, as some of our work streams reach completion. That said, we still have some infrastructure and technology initiatives that we are working on, that will absorb some of those savings. And at the same time, we are rapidly turning our attention to optimizing our business model in a way that produces positive operating leverage. At 59.06%, our efficiency ratio in the fourth quarter has improved slightly from the previous quarter and down 640 basis points from the fourth quarter of 2013. We expect continued progress as we get to the fourth quarter of 2015. Given the environment, we expect lower spending in 2015 as compared to last year and our goal is to produce positive operating leverage. I’ll remind you that we expect our usual seasonal increase in salaries and benefits in the first quarter of 2015, which primarily reflects annual equity incentive compensation, as well as a handful of other items. Last year, that increase was in the neighborhood of $40 million. We see no indications of a change in the credit cycle. But with net charge-offs for the full year at just 19 basis points which is roughly half our long-term average, our conservatism won’t let us count on beating that figure in 2015. With respect to capital, we have effectively closed any gap that we had versus our peer regional banks. This lets us turn our attention to enhancing the efficiency of our capital structure at these higher levels. And I will conclude my remarks -- my prepared marks with the topic that I’m sure you are all closely focused on, the merger with the Hudson City Bancorp. As we’ve noted, we feel we have made tremendous progress on all of our initiatives and milestones across our most important work streams. Both parties remain committed to the merger and as you know, agreed to extend the date after which either party may terminate the merger agreement to April 30, 2015. Finally, the financial metrics we calculated at the time of the transaction -- at the time the transaction was announced remain intact. Of course as you're aware, our projections are subject to a number of uncertainties, various assumptions regarding national and regional economic growth, changes in interest rates, local events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now let's open up the call to questions, before which Lorie will briefly review the instructions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Brian Klock of Keefe, Bruyette & Woods.

[Brian Klock:]

Good morning, René. Good morning, Don

[René Jones:]

Good morning.

[Brian Klock:]

Hi, guys. So just two quick questions on the margins, thinking about where the current curve is and your commentary about LCR. So just thinking about the excess liquidity, the accretable yield number. If we take it -- maybe it's a 3.20ish, 3.24 number that we go into next year with, I guess what should we be thinking about as far as what you need to do on an LCR purpose to kind of build up your securities balances, your HQLA? I noticed that your investment securities balances are down about $350 million in the fourth quarter. So, is that something you would do throughout the year? Or is this something that maybe you would wait till there is maybe a better outlook in the long end of the curve? So maybe just talk about what you are thinking about with those LCR actions in 2015.

[René Jones:]

Thanks, Brian. I mean, I think that’s relative straightforward. We had a fair amount of purchases in the first three quarters of 2014. We took a pause in the fourth quarter. And I think our plan would kind of be to go back and do the same to sort of finish out the work that we have to do. So my sense is that the first three quarters of '15 will look generally very similar to what we’re doing in '14. And I think beyond that that should bring us well into compliance. I mean, we are in very good shape today. And I think what you will see next year is closing the final gap and then obviously thinking on the liability side beginning to replace debt, that’s maturing and getting into more of a routine cycle.

[Brian Klock:]

Okay. And a follow-up question on capital. I think you are right, thinking about where your TCE and your core capital is, your common equity Tier 1 all fully phased-in are at levels -- at above some of your peers versus when you announced the Hudson City deal. I guess with the CCAR that you just submitted, I guess what are you guys thinking about return of capital and maybe be in a position to ask for a buyback or what level of Tier 1 common would you be comfortable with in order to start returning capital again?

[René Jones:]

Well, I think I can respond to in sort of general terms. I mean, so, as you know, we got through one CCAR and we’re pleased with how we fared. We believe and feel very comfortable that we made further enhancements, particularly to the sustainability of the process. So we are pretty pleased with the work we’re doing going in. From a general perspective, in terms of priority now that we have a higher amount of core loss absorbing capital, we’re heavy on the hybrid side. So we’ve not sort of one of the few people that have not yet optimized their hybrid. So that’s something that sort of falls into the first priority for us to figure out how to begin to take those instruments that won’t qualify as core capital or regulatory capital and move those off of our balance sheet. And then as we kind of work through fully implementing out our risk management infrastructure, I think it’s very logical that what you would see overtime, I can’t really talk about the timing, but that we would take what is very, very low payout, total payout ratio now relative to the average and we begin to sort of move that in sync. So for us, at some point in time it’s -- bank maintains its historical position. We tend to generate a lot more capital than others, but I think our plan is to sort of steadily make improvements in getting back to a more efficient space there. Timing, I can’t really talk about.

[Brian Klock:]

So I guess as far as the -- that timing could be something that, would you feel comfortable with the Hudson City merger closing this year, being able to put a capital return into this year's numbers?

[René Jones:]

Well, I mean, regardless of any CCAR test and what have you, I mean for us to be buying back shares while we’re entering a transaction just sort of outside of our thought process and our philosophy, our policy, not really our policy but just our behavior. So, that’s not something that we really have ever done.

[Brian Klock:]

Okay. Makes sense. Thanks for your time.

[René Jones:]

Sure.

[Operator:]

Your next question comes from the line of Matt Burnell of Wells Fargo Securities.

[René Jones:]

Hi, Matt. 1

[Matt Burnell:]

Good morning, René. How are you?

[René Jones:]

Good.

[Matt Burnell:]

Just a couple of questions. One on the trust income line. I know you mentioned that you are expecting some growth in that next year. I guess I'm just curious if you are thinking about potential investment in that business, maybe not inorganic growth, but just further investment in that business along the line of what several other regional banks have done to try to boost fee revenue?

[René Jones:]

That’s a good question. I mean, I think right now I often say that when we do transactions that there is the pricing, there is the integration, but then there are the merging of the systems, but then there is longer integration. And the way I think about it is, we are always open to opportunities, but we are very, very heavily focused on continuing to make improvements into our back-office or infrastructure and our investment platforms. We are still really very much in an investment mode in that space. And it’s been very nice to see that the topline revenue growth has consistently grown since the -- what has been 2.5 years since the merger, 3.5 years. And so that’s been positive, but we are still in investment mode. So to the extent that there is now lot of opportunities out there, we are not out there chasing them. But obviously down the road if something were to make sense for us to do, we would probably entertain it.

[Matt Burnell:]

So barring an acquisition, it sounds like you are still thinking about sort of mid-to-low single-digit growth in that line item, specifically for 2015.

[René Jones:]

Yes, definitely.

[Matt Burnell:]

Okay.

[René Jones:]

And then, what I would say is that in that business topline and bottomline over the longer term are not the same because there is opportunity for leverage, right. And then the way we are thinking about it as well is the fee income aspect of it is very attractive as well.

[Matt Burnell:]

Right. Makes sense. Just a question on your C&I business, maybe a little bit on the CRE side of things. What has been your experience the last quarter or two in terms of demand for lines? And some of your competitors have suggested that in 2015 there may be some elevated pricing on C&I lines just as they begin to work through some of the capital implications from some of the regulatory pronouncements, but just curious as to how you are thinking about that heading into 2015?

[René Jones:]

I guess, I don’t know if we’re in a different space. I mean, we have been pretty disciplined throughout. And what I can’t talk about next year, but as I look at this quarter, talking to every single region, the one thing that’s become common is that there is consistent competitive pressure. So from time to time when we get together, you will see some regions feel a little bit less pressure than others this and the fourth. As we finish the year everybody was very loudly speaking about the fact that our competitive pressure was relatively intense and probably stronger in the second half of the year than in the first. Generally speaking, the big issue that we are seeing -- one of the big issues that we are seeing across the board is that people are moving out in terms of term, 10-year deal structures on commercial real estate. And what’s interesting about that is it's hard because our metric is pretty pure. So we, sort of, are questioning whether people are really getting the right risk-adjusted pricing for that that added term but generally other than that, no other big changes.

[Matt Burnell:]

Okay. One final question and I'll go back in the queue. You mentioned appropriately managing your capital structure would include getting rid of or refinancing some of the hybrids. Would you be thinking about refinancing those hybrids in terms of perpetual preferred stock or is there some other product you're thinking about?

[René Jones:]

No, we’ve got the appropriate amount of perpetual preferred stock for a balance sheet of our size or balance sheet of our size with, if you were to include Hudson City. So it's just actually excess sitting there.

[Matt Burnell:]

Okay. Thanks for taking my questions.

[René Jones:]

Sure.

[Operator:]

Next question comes from the line of Bill Carcache of Nomura Securities.

[Bill Carcache:]

Thanks. Good morning. Hi, hi René. I guess just in terms of thinking about a range of different potential outcomes, let's just say for the sake of argument that you guys did not receive approval to close on the Hudson City deal. Can you help us understand what would happen to your efficiency ratio over the next few quarters as you would unwind some of what you guys have done in anticipation of closing? It seems like you'd retain the benefit of much of the BSA/AML spending that you've done. But I was hoping maybe you could parse out for us how much of your expense base you'd be able to cut, to the extent that you think about the future without Hudson City being a part of it?

[René Jones:]

Yeah. I mean, I’ll start up with saying, we don’t think about it in any different with or without, I mean, the numbers might change but we don’t think about it any differently because our key is sort of make sure that the core of our institution is very healthy. And so as we look at the current environment, I think it's a good reflection of what we’re likely to see as the banking industry going forward and revenue growth is very slow. You saw that we had mid-single-digit loan growth and we had some measures I mentioned of margin compression. And then on the fee side, our mortgage banking is relatively elevated. So it’s hard to see that growing dramatically. So I think you're in a slow revenue growth environment with a lot of healthy institutions competing for a few solid customers. We've been here several times before and part of that equation is looking at sort of the operating leverage. So as we go into -- as we go into ‘15, we would expect to see continued improvement. I won't repeat my comments around the spending on our projects most of which is in -- is in -- heavily in professional services. But if you just take that topic for a minute, if you were to look at our peer group which includes 11 institutions, so 12 with M&T. Typically over time, we are in the top quartile in terms of return on it -- return on tangible assets. And if you were to look through the third quarter with our higher level of spending related to these initiatives, we’re actually just outside of the top quartile. The single largest difference if you go across margin, different fee categories is the single largest difference is our spending and professional services. And simply moving that to the average spend for the peers puts us squarely in the top two or three position and in terms of return on tangible assets. Now we are focused on our overall business. And as I mentioned, we’re beginning to look around and think about other ways in which we should be optimizing the firm at a time we’ve gone through all this change. But if you look at just that particular item, it really is very telling as to what sort of has dragged down our returns of it. So we’ll have heavy focus there. And then I think we'll try to gain traction with some other initiatives that maybe we can get into full swing in the second half of -- our second half or towards end of ‘15 that will help us going into ‘16. So I expect continued improvement in our operating leverage.

[Bill Carcache:]

Okay. So is it fair to say that your comments or your outlook, your goal of achieving positive operating leverage in 2015, that's something that you're targeting with regardless of whether the deal closes?

[René Jones:]

Yeah. Yes definitely and in fact as I guess I'm thinking about it, I'm not thinking about the deal when I’m saying that.

[Bill Carcache:]

Okay, that's great. Switching gears to margins, just setting aside the effects of excess liquidity that you are parking at the Fed and some of your comments around the LCR actions, could you help us understand what happens to your NIM if rates were to hold at current levels?

[René Jones:]

That is the three to four, that is the three to four.

[Bill Carcache:]

Okay.

[René Jones:]

I tried to say it in a different way. I mean, I guess, if you would move the LCR out of the way and you use the forwards largely if you believe the forwards, you don’t have much compression just looking at the forwards through to the end of 2015. But our current pace has been three to four and to the extent that we don't see increase in rates that's where it will be.

[Bill Carcache:]

Okay. That's great. And finally, the last one for me is on your effective tax rate. It was a little bit higher this quarter, anything noteworthy there? Can you talk about maybe what was behind that and where we should expect it to settle going forward?

[René Jones:]

Yeah. It’s a great topic in the sense that we’ve got so few shares outstanding that our numbers are really sensitive. So it’s like a couple million buck. So no, you really can attribute to any one thing maybe in a period we have lower credits available. But on the whole, I don’t expect any significant change when you look at ‘14 versus ‘15.

[Bill Carcache:]

Got it. Thanks, René. Appreciate it.

[René Jones:]

Yeah.

[Operator:]

Our next question comes from the line of Ken Zerbe of Morgan Stanley.

[Ken Zerbe:]

Great, good morning. René, could you just go back to the comments on CRE, or the CRE growth? I just want to reconcile the comments that you were making about competition and 10-year terms versus the very strong growth you guys had in the quarter?

[René Jones:]

Yeah, I mean -- I guess the big thing that I could do is kind of talk about what we saw. So one of the things that I thought was really relatively interesting in particular as we sort of finished the year is that like this quarter, over the last 12 months, our loan growth has been comprised of 5% in the New York City Metro, Philadelphia and New Jersey area and 5% in upstate New York and essentially flat i.e. zero in Pennsylvania and in the sort of Baltimore, Washington area. And you know a lot of the -- there is a sort of a greater abundance, at lease, in our portfolio on the real estate side as you get down to the Washington area. And what we sort of seeing there is that that there appears to be sort of -- I don’t know if it’s an inflection point but there is abundance of office space. You got to remember that the sequestration stuff is still affecting the economy there and then in the defense sector. So it just seems like as we look back over the last 12 months that really the slower growth we’re being seeing there in total and in the real estate side has been affected by the economy whereas here in upstate New York, it's been stronger than it has been quite frankly in the last 30 years. And similar is true down in and around our metro region. Other than that, I mean, the commentary is very consistent across the board. So what you're seeing and we were able to get the growth, the billion dollars of growth that you saw in our loan book 6% while that’s just coming from our core customers. And when we’re winning, it's usually because we have some sort of long-term relationship advantage that allows us to sustain the deal that provide some benefit beyond pricing, particularly, when it comes to smaller community banks. So a lot of pressure that we’re seeing is coming from the smaller community banks but they just don't have the breadth of services. So if you’re getting a larger more mature client, we tend to have a bit of an advantage there.

[Ken Zerbe:]

Got it. Then the growth, the loan growth outlook, I think it was 4% over the next year. Is that predominantly driven by commercial real estate or is that a little more balance between CRE and some of the other categories?

[René Jones:]

No. I mean, I think it's very much the same as both across the board, maybe a little greater on the consumer side but it's a smaller portfolio.

[Ken Zerbe:]

Got it. Okay. Thank you.

[Operator:]

Our next question comes from the line of Erika Najarian of Bank of America.

[René Jones:]

Good morning, Erika.

[Erika Najarian:]

Good morning. My first question is a follow-up on the margin. René, can you tell us how much of the deposit growth you experienced in the fourth quarter you expect to flow out, and sort of, and timing as well? And to that end, you would still have some excess deposits. Do you expect that to be funding your future HQLA purchases?

[René Jones:]

Yeah. So roughly at the fed we had $9 billion in the quarter and at the end of the quarter it was already down to six. So three of the four rise was sort of off our balance sheet by the end of the year. So that gives you some sense of the normalization there.

[Erika Najarian:]

And that would be it?

[René Jones:]

It’s hard to say, depending on what the client needs are but my sense is that the year-end numbers are better number than what you saw during the quarter, that 5 billion or 6 billion is a better number. And then in terms of the LCR, we’ll be back into the market with unsecured fundings primarily. And we really never, even though the deposits that we’re talking about on the trust side, definitely qualifying the liquidity coverage ratio. We kind of in our internal view, sort of cap the amount that we use because of the uncertainty around the availability of those deposits. So most of the LCR purchase would be funded at the wholesale market.

[Erika Najarian:]

Got it. And a follow-up question. We heard you loud and clear that you expect progress throughout 2015 on the 59% efficiency ratio, and heard you loud and clear on how you could do that on the expense side. I'm wondering if this the 59% -- the progress from 59% can happen even if nothing happens to the curve?

[René Jones:]

I think, I said yes, I think, yes, we will continue. I just can’t tell you how much but that’s what our efforts will be to do. And quite frankly, the tougher the revenue environment is out there, the more time you actually have to focus internally on your operations. We've done it before so it tends to be something that we're pretty good at, so yes.

[Erika Najarian:]

Thank you. That was clear. Appreciate it.

[Operator:]

Our next question comes from the line of Bob Ramsey of FBR Capital Markets.

[Bob Ramsey:]

Hey, good morning, René. I had just a couple questions about fee income. On the mortgage banking side, could you split what of the income was origination versus servicing in the quarter?

[René Jones:]

Yes, I probably can. Give me a minute. Someone will do that, so you can hear all the shuffling of paper running around.

[Bob Ramsey:]

Thanks. I know you had noticed that the uptake in service in year-over-year with the acquisition? Maybe while you dig that up I’ll ask another question about deposit fees. They were down I guess, quarter-over-quarter and year-over-year this quarter. I know there has been a lot of focus industry wide on deposit fees. Just curious, there was anything unusual this quarter or how you're thinking about the deposit fee growth in 2015, whether it will be flat or even possibly lower than ‘14?

[René Jones:]

Yeah. We had some discussion about that. I mean, I personally think it was a little unusual. Last year they were down slightly but I think that was across the board in the industry with behavior changes but our volume of transactions was lower. We had some really nice -- very large storm in Buffalo but still with the year end and the holiday spend I was a little bit surprised about the nature of the decline. Having said that, it was both on the consumer and the commercial side. So I think we’ll have to wait and see what underlying customer behavior is. So we do this, I mean, I guess on the residential side, -- I’m getting all this. So I mean, roughly we had about $70 million of our mortgage banking income was on the retail side and another $23 million was on the commercial side and of the $70 million, about $56 was on servicing.

[Bob Ramsey:]

Okay. Okay. That's helpful. And then if I circle back around, I know you were asked about capital a couple ways. I might not have caught it. I know you said that that M&T has a very low payout ratio relative to average? I was just curious if you were speaking about total payout or dividend and I think historically you all have always had sort of a below average dividend payout ratio, but in an ideal world when you do start to look to take the payout up? Could you just sort of remind us how you think about dividend payout and where you'd like it to be?

[René Jones:]

Yeah. I mean, I think, first of all, actually, I was talking about the total payout ratio, when I look across the industry.

[Bob Ramsey:]

Okay.

[René Jones:]

And I think, you're right, we’ve always been historically lower. We think, we felt, always felt that was a more prudent decision and of course, we didn't cut the dividend. So it sort of hovered around 30%, which is not atypical for we've been. I think what is atypical is the long period of actually not having any sort of increase in that dividend. But as a general philosophy, I don't know that it's going to be very different. We think that it matters regardless sort of what the rules are currently that in order to have more flexibility, it probably makes sense. At a point in time when you’re distributing the normalized percentage of your earnings that making sure that a decent percentage of that or a large of that is in repurchases is probably where we would end up on the long run. I don’t know if that tells you much, Bob.

[Bob Ramsey:]

So, I think it does. I think if I understand you correctly, the dividend payout is in the right ballpark, I mean, maybe there is a little bit of room, but it's in the right ballpark and really the opportunity when the time comes is to be more active on the repurchase front.

[René Jones:]

Yeah. I think that’s right and I think, if you just don’t get yourself into the guidance space for a minute, outside what we typically would do in this new environment. I think, really what it says is that you got to, to the extent that there is there is no hard limit, but to the extent that you are over 30, you should be very, very comfortable with your risk management platform and your ability to monitor and to see risks, identify risks. And so a lot of the way we think about it is that over the last year and then in the coming year, we continue to make improvements. So we’ll talk a lot about that during the course of the year in those areas and I think that may end up giving us more flexibility as those new structures mature.

[Bob Ramsey:]

Okay. Great. Thank you, René.

[René Jones:]

Yeah. Sure.

[Operator:]

Your next question comes from the line of Ken Usdin of Jefferies.

[Ken Usdin:]

Hey. Good morning, René. Hey, René, coming back to the net interest income, just wondering so with the normalization of those trust deposits? Can you just help us understand what the starting point is for the NIM when you reset that or assume that the 3.10% is kind of not so much a low point, but lower than you'd expect to start the year with that normalization?

[René Jones:]

Well, had the balances at the fed remained at $5 billion where they were in the previous quarter. The net interest margin would have been -- printed net interest margin would have been 13 basis points higher than the 3.10%, so 3.23%. And we've not gotten back, the whole $4 billion as of the end of the year. We got back three quarter of that, right. So you can pretty very much use those numbers to kind of figure it out.

[Ken Usdin:]

Right. Okay. So then I just, I think, I'm trying to understand then, when you think about net interest income dollars, we have to think about the balance sheet likely to be smaller, but a higher starting point for the NIM and then you get the 3 to 4 core plus LCR?

[René Jones:]

If there is no change in the rate environment, yes.

[Ken Usdin:]

Okay.

[René Jones:]

If there -- if the rate environment pans out like the forward curve say, you just get a total of probably something like 3 to 4 just for the LCR or some like that, right.

[Ken Usdin:]

Right. So roughly speaking, no change, you get 6 to 8 and then you try to offset that with balance sheet growth? So, I guess, where brings it back to is like, off of the $2.7 billion of NII this year, do you think you can grow NII this year kind of like you were talking about on the fee side?

[René Jones:]

It’s our job to try. But it’s a tough revenue environment.

[Ken Usdin:]

Got it. Okay. And then on the cost side, René, just a similar question coming back to the, can you remind us just how much of the consulting costs are in the current $680 million?

[René Jones:]

No. I don’t have that number and I think, the best place to get it is off of the -- where is it comes on the [190] [ph]?

[Don MacLeod:]

Yeah. It will, components of that will be reflects in [190] [ph] when it comes out.

[Ken Usdin:]

Okay. Because I think the question is just -- similar question, René, just on the cost side, you guys have been at the $680 million type level, plus or excluding the first quarter seasonal computation bump? And I think we're just trying to understand the moving parts between when you mentioned finally starting to rationalize some of that consulting cost versus the magnitude of those incremental investments? So can we finally start to see that other line start to net down or total expenses start to net down as that compliance -- as that consulting cost come -- starts to come in?

[René Jones:]

Yeah. I think that’s exactly how we think about it, I am not giving you a number, a little less prepared than I should be, because at the same sort of number that’s it’s been out there for a long time that you can actually see in the regulatory reports. But that’s exactly how we think about it and as each of the phases of the work streams, sort of work themselves down, there's a lot of excess professional services that are no longer necessary because they are covered by the existing staffing base that you’ll see come down. And it might not be all of that because we are continuing to invest in technology, in some of those areas as well. But there should be a noticeable amount by the time we get towards the end of the year.

[Ken Usdin:]

Got it.

[René Jones:]

We haven’t seen it before that, but yes.

[Ken Usdin:]

Understood. And the last point on that is, can you just give us an update just in general terms of where you are on those workstreams, in terms of the seven major kind of promises you have related to getting compliance and whatnot? Like, how many have we made through and are we at a point where you're actually now over the hump, so to speak?

[René Jones:]

Yeah. I mean, generally, we would characterize ourselves as on track with every single workstream that we have. And I think probably one of the most meaningful things that’s out there is -- think about this is, as by the time we get ourselves to March 31st for the first quarter, we will have had implemented our new customer risk rating system and it will have actually been running and in effect for a full year. And so that's great because through the course of ‘14m as we’ve run that we've been able to get some of the, any kinks out of the system and feel really good that as we onboard new customers that we’ve got a good stable system to do that. So that I think is a real key milestone. I think we've got to -- we use the term remediate our existing customer base. We’ve got to do the entire customer base, 5 million accounts, 3.5 million households or 3.7 million households and we've gotten through the majority of the high-risk customers and we are on schedule with that work. And so no blips in sight there. And of course the remaining group of moderate and lows, we will get through over time right. But that will take some time but we are on track. Transaction review is well underway. And I think I started talking about probably in the third quarter of last year and on schedule for completion. And then we have -- really are pleased with the fact that we now have controls in monitoring and management reporting that is under -- is being operated in every single business unit. And that allows us to sort of escalate any customers’ issues that are there. So relative to where we were before, we have made substantial progress. The capabilities that we have today versus where we were, say two years ago are vastly different. And so we feel very, very good about that progress.

[Ken Usdin:]

Thanks, René.

[Operator:]

Your next question comes from the line of Terry McEvoy of Sterne, Agee.

[Terry McEvoy:]

Hi. Thanks. Good morning. Out of the $11 billion of consumer loans, could you just remind us how much is auto? And could you provide possibly any commentary around competition and the ability for growth in that portfolio in’15?

[René Jones:]

Yeah. So if you look at the portfolio, it's about just under $11 billion. And in terms of average balances, the biggest portfolio there is a home equity line of credit which is $5.8 billion and our auto portfolio is just under $2 billion and that's rounded out with the next biggest thing is sort of…

[Don MacLeod:]

Primarily recreation finance.

[René Jones:]

…yeah recreation finance and other loans, other personal loans that are about $3 billion. So, I mean, I think with the consumer loans, those things tend to move in a very predictable pattern. We've seen pretty steady growth over the quarter so if you look for example, we said 7% over this past quarter. It was 7% year-over-year in terms of the fourth quarter, over fourth quarter. So, I would expect that to continue at that pace and maybe actually be slightly higher based on what we are seeing with the trends. We are not changing our credit profile in that space relatively conservatives.

[Terry McEvoy:]

And then just as a follow-up. This morning, I took a look at the presentation you used in Boston last November and it mentioned stronger competition from bank and unregulated bank lenders. Could you talk about where the unregulated bank lenders are showing up? Has there been any impact so far and what has been your response? And then are any of the initiatives that we are seeing in the expense line, will they make M&T more competitive going forward?

[René Jones:]

Remember that second question. We are seeing it mostly in Commercial Real Estate. So you get life companies that have been in the game for quite some time now looking for yield and that’s made things pretty competitive. You’ve also had conduits back in that space. And then the thing that's little different this cycle is obviously you’ve got non-bank lenders in the form of private equity. And I think in particular spaces like leverage lending and some spaces like that where the regulation has been tightened up and there is higher scrutiny. Also different capital rules, I think, a number of private equity firms have decided to sort of offer their own credit. And as I mentioned before, we see that also because in Wilmington, we may provide the trustee services for those businesses. So that's one place where we've actually seen quite a bit of activity. What’s interestingly enough, that actually is a trend here in the U.S., but it's also a trend overseas in London, you are seeing the same types of activity. I think it's all driven by the higher forms of regulation. And then second part of your question was about whether we had any advantage from the work that we're doing. You want to ask that again? Did I get that right?

[Terry McEvoy:]

That is correct. You're investing a lot. We see it in the expense line. And where is the upside as it relates to the competitive landscape that you just talk about, if any?

[René Jones:]

Yeah. I mean, I think, look, if I look at what we’re doing and I just, I look at clearly BSA/AML program, clearly the risk management and compliance updates and then definitely on the technology side as well, every one of those investments is a leverageable investment. And so one of the reasons why we -- or a number of reasons, but one of the reasons why we were so focused on doing this fast is because to the extent that you get behind you, you can sort of begin to participate, mature those things right and then use them as you grow the institution. So I can’t give you timing, but clearly we think of all of those investments and the investments that we will make in 2015 and that like. I think that’s really important.

[Terry McEvoy:]

Thank you.

[Operator:]

One final question comes from the line of Gerard Cassidy of RBC.

[Gerard Cassidy:]

Hi, René.

[René Jones:]

Hi, Gerard.

[Gerard Cassidy:]

I apologize. I've been jumping on and off your call. But obviously, your Basel III Tier 1 common ratio is very strong today at about 9.6%, well above the required numbers a bank your size needs to have, about 7%. Recognizing you've got to carry more than that because of CCAR, looking longer-term, when you go through CCAR you guys come out real well. Where do you want to manage that number to in terms of once you get the Hudson City deal closed and you guys are back on a normal track?

[René Jones:]

Yeah. I think, I sort of implied that in my comments earlier Gerard. I think the way I think about it is this is a process, right, and it’s a process because we’re going through a period of great change. So we took our efforts. We didn't issue shares during the crisis. We then built our capital up organically to where it is today. We made our investments our different platforms, particularly in the CCAR and risk management. We fared well in the CCAR test, right. And then as we kind of go into this test, it’s an evolution. So my sense is that from a pure capital perspective, you see in a test there is not a need given our risk profile to have higher capital levels. But I think the rest of that process is to make sure that our risk management process is to sort of keep monitoring that are very, very sustainable. That’s the sort of phase we’re in now. And then as we kind of check that box, I think our job is to get back to normal distributions and get the capital out there back to the investors. I think that issue becomes exacerbated were we to consummate the Hudson city deal, because it essentially is a portfolio that under us would be much, much smaller, right, which then suggests it throws off a lot of equity and the only way you create value is to get that excess equity back to the shareholders over time.

[Gerard Cassidy:]

I'm sorry. Go ahead.

[René Jones:]

No, you go ahead.

[Gerard Cassidy:]

No, because my thought was bringing the capital ratios down for you and many of your peers, they seem to be so high and the ROEs for everybody are pretty weak. And so to get these stated ROEs back up to 12%, 13%, the Es need to come down. And I didn't know if longer term you guys would be comfortable with an 8.5% Tier 1 common ratio or is that just too low? And then as an add-on to that, there is some talk about raising the asset size of CCAR banks. And if those asset sizes are raised to a level well above yours, assuming the Hudson City deal closes again, would you consider even a lower ratio? Because you guys historically manage your capital so well, now it seems like you've got so much extra capital.

[René Jones:]

I don't think we’re thinking about it that way right now, Gerard. I think that -- I don't think capital levels -- I wouldn’t think about capital levels coming down from where they are today. I think that they are healthy, but they're probably for the industry where they were continued to be. When I look beyond that and I look into our portfolio and earlier I made some comments about sort of about return on tangible assets. We typically are in the top quartile of our peer groups and we’re not right. And so I see a fair amount of opportunity in trying to, now that we’re under all the new rules and under all the new processes trying to figure out how to do them more efficiently and to optimize the spending that we've had in this big period of investment. And so really what I'm thinking about is making sure that we can take that return on tangible assets and move it back into sort of number the top three positions amongst our peers. And I think we see ways to do that, and so that's about focusing our operations. I think over the course of the next couple of submissions two things will happen. One, we will get to a much more normalized payout ratio, because you will gone through the test and you will have a lot of evidence that suggests that not only on your models but under the national models, people have a good sense of what your profile is. Down that road, I mean the way you would end up releasing capital from where you are today is probably you would have to show that you're having lower and lower risk profile under stress and that may happen. But that's really not a topic that I think is out there today.

[Gerard Cassidy:]

I appreciate the color. Thank you.

[René Jones:]

Sure.

[Operator:]

At this time, there are no further questions. I will now turn the call to Don MacLeod for any additional or closing remarks.

[Don MacLeod:]

Again, thank you all for participating today. And as always, if clarification of any of the items on the call or news release is necessary, please contact our Investor Relations Department at 716-842-5138. Thank you, and good bye.

[Operator:]

Thank you for participating in M&T Bank's fourth quarter 2014 earnings conference call. You may now disconnect.